multiple factors that may have contributed to the phenomenon, but it is very difficult to determine their respective roles. Caulkins and Reuter (1998:602–603) offer these possible explanations for the price drop:

[I]t is possible for overall price to decline even as enforcement stringency increases if the declines in the other cost-components more than off-set the increase in enforcement’s component. For example, import costs might decline as smugglers acquire experience (Cave and Reuter, 1988). Labor costs might decline if the industry shifted to less skilled labor (e.g. from pilots to small boat crew members) or if there was a decline in the prevailing wage for the current dealer (e.g. aging dealer/users whose legitimate labor force opportunities weaken as their drug-using careers lengthen). Risk compensation for the physical risks of selling drugs could decline if the markets stabilized and the risk of being killed declined. Stares (1996) argues that the trend toward globalization, improved communication and transportation networks, and the persistence of poverty in source countries are enhancing the ability to bring drugs to market cheaply.

As Caulkins and Reuter suggest, there are many ways in which the costs of drug production and distribution may have fallen during the 1980s, shifting the supply curve downward and thus implying lower equilibrium prices, everything else being equal. Production efficiencies may have stemmed from new higher-yielding crops or from economies of scale as the industry adjusted to the heightened demand associated with the emergence of crack. The drug industry may have experienced the learning-curve effect often associated with new industries as they find ways to be more efficient in their operations.5 The cost of marketing drugs may have fallen as retail selling was taken over by juveniles willing to work for low wages. High profits may have attracted new producers and dealers into the market and may have led existing dealers to expand their transaction volumes (Kleiman, 1992).

At the same time, the demand for drugs may have changed during the 1980s. The usual presumption has been that demand for cocaine increased until the mid-1980s as the crack epidemic took hold. However, at least two countervailing forces were at work as well. First, the federal government substantially increased spending on prevention and treatment programs. The Office of National Drug Control Policy estimates that from fiscal year 1981 to 1989, federal spending on treatment doubled and spending on prevention increased by a factor of 8 (Office of National Drug Control Policy, 1999b). An increase in spending on mass media prevention campaigns should, if effective, unambiguously shift the de-


Learning by doing has a long history in studies of industrial organization, productivity, and growth. Arrow (1962) provides a seminal theoretical treatment of the subject.

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